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Budgets: why use it or lose it is harmful, reasons solutions

The budgeting process and budgets themselves have significant impacts on management actions and performance, in both positive and negative ways. It is common at many local, state, or national governmental agencies, and nonprofit organizations, and even in some for-profit enterprises for managers to increase spending at the end of the budget cycle. This process, usually referred to as "use it or lose it" can be harmful to objectives of any organization. Managers do this, as they often feel that if they don't spend the amount that was budgeted this year, next year their supervisors will reduce their budget by the amount not spent in the current year. So, to avoid having their budget dollars reduced, managers often increase spending at the end of the year to ensure all budgeted amounts are spent even if items are not necessarily needed. This is more common in government and nonprofit organizations, but can be found in for-profit enterprises as well.

Requirement: Write a memo to the budget managers in an organization, assuming you are the CEO. Your memo should direct budget managers not to utilize this approach, but also offer a logical rationale, and perhaps an alternative solution.

Solution Preview

There are many reasons why padding the budget and spending everything by year end should not be a practice of our team. Here are the top six and my suggested practice to avoid the temptation:

1. IMA Ethics

We are committed to the IMA ethical code. That means that we communicate fairly, with all relevant information, and avoid actions that result in personal advantage. Spending just to be sure that your budget continues at a certain level is not ethical and violates the IMA ethical code. This lack of integrity about how resources are used will reduce your professionalism and hurt the firm. And, once it becomes apparent that you have this practice, your integrity in other matters will be suspect.

2. Tone at the Top

One of the best barriers to fraud in an organization is the tone-at-the-top. The teams looks at us. If we shade the truth for personal advantage, they will think this is acceptable. And so when they take the overruns or fail to report a situation, they will be doing as we do. So, by showing the team that we don't mind a ...

Solution Summary

Your discussion is 702 words and a reference and gives six reasons that this practice is harmful and a solution that solves this practice.

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